On Our Radar

On Our Radar

Eurozone Inflation Beats Forecasts -- Update

Inflation in the eurozone picked up markedly in August while the region's jobless rate remained at its lowest level for more than eight years, underpinning expectations that the European Central Bank may soon announce a gradual withdrawal from its massive stimulus programs.

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The annual inflation rate climbed to 1.5% from 1.3% in July, propelled by energy prices, the European Union's statistics agency said. The region's unemployment rate, meanwhile, was unchanged at 9.1% in July, the latest available data point, which marks the lowest level since February 2009.

Against the backdrop, "the ECB's strong policy support is becoming less necessary," said Jennifer McKeown, an economist at Capital Economics.

The ECB has come under pressure from some German officials and private-sector economists to wind down its monthly bond purchases amid signs that the region's economic recovery is broadening.

ECB President Mario Draghi has said that a decision with regard to quantitative easing, as the bond purchases are known, is likely this fall, but economists on Thursday remained divided on the timing of an announcement.

In any case, the ECB will need to tread carefully, they said. A strengthening euro is threatening economic growth and the revival of inflation in the eurozone by crimping the international competitiveness of the region's exporters and reducing the cost of imports.

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"We think that the ECB will bide its time after its meeting next week before announcing a gradual asset purchase taper in October," Ms. McKeown said.

Inflation in August was above a consensus forecast of 1.4%, but it continues to undershoot the ECB's target of "below, but close to" 2%.

In addition, Eurostat's measure of core inflation--which eliminates volatile components such as food and energy--was flat at 1.2%. Economists said that there is little reason to believe that core inflation will move much higher soon.

"Despite the continued cyclical recovery and the likelihood of further declines in unemployment, the strong euro means that the ECB is likely to revise down its inflation forecast at its next policy meeting on Sept. 7," said Chris Hare, an economist at HSBC.

Separately, Germany's VMDA engineering federation said Thursday that plant and machinery orders in July surged 10% from July last year, a development that is likely to underpin industrial production in the months ahead.